DBFOM is facing a fight for survival. The recent multi-trillion dollar federal legislation efforts have put an enormous amount of money into the system, which has filled up the coffers of many authorities.
"I don't think as many governments are feeling the pressure to consider P3s as a delivery model, notwithstanding that it would have benefits in risk reduction," says Allan Marks, partner at law firm Milbank.
A combination of supply chain difficulties and inflation have made projects not only more expensive but also uncertain, making the complex nature of P3s "devilishly difficult, not just for private developers but for the government.
"If you're going to have a highly leveraged capital structure - which is what the P3 structure contemplates - then the project has to be de-risked, but instead we're seeing more risk," adds Marks.
This has resulted in the market being “more constrained” than it has been for a while, he continues, pointing to longer construction schedules (with more float to account for potential supply chain disruptions) and higher construction budgets (with larger contingencies and higher interest during construction). “It's just harder for these things to pencil out.”
It’s not just money in the system that is fueling a pull-back from traditional P3s, however.
“There is more hesitation around traditional DBFOM P3s because of the financial commitment and fears of recession and interest rate [changes],” says one advisor. “They used to think it was free money and additional extras, but now there is a bit more education around the partnerships, and accepting risk you can manage.
“As an industry, we need to understand the reservation, and be patient with clients. Not to push a certain delivery model [but instead] put forward what is best suited to their needs and objectives, and tailor a response to that. Sometimes it's a P3, sometimes it's not.”
The confluence of these factors will “stifle the P3 pipeline and set the industry backwards on the rationale for P3 approaches”, says Adam Shaw of Anser Advisory.
“Unfortunately because there is still such a systemic misunderstanding on the value drivers of P3, many folks are turning their head away from P3 because they see the renewed level of funding in the market.
“Just because private finance is no longer a factor doesn't mean it shouldn't still follow a P3 methodology. Operations, maintenance, performance, availability... all of these aspects of P3 delivery can still unlock massive value for public clients even in the absence of a funding gap,” he adds.
Marks also points to the P3 model’s inherent skills, such as financial discipline and contractual risk allocation. He agrees that these benefits could be transplanted onto other models to help authorities deliver their projects.
“Don’t make the mistake of thinking P3 about financing, it's not - that’s the tail wagging the dog. That’s a misconception that we have to get past,” says Jay Brown, chairman and managing director of advisory firm Hayat Brown. “It’s about the more efficient, long-term benefits of performance-based delivery.”
He points to work he’s doing with a school board in Austin, Texas, which while being well funded through a previous bond, is still utlizing some aspects of private sector capacity to speed up delivery of new assets.
This kind of project is coming forward more and more across the country, particularly as the welcome economic development happening across cities is leading to a change in the population.
As a result, authorities, such as the school district in Austin, are looking at their surplus campus buildings and whether they can be transformed into useful assets, both from a monetization aspect and community benefit.
This is a prime example of authorities being more interested in alternate delivery as a whole, and the more flexible the P3 industry is to this trend, the better.
“These are the nuances that municipalities are dealing with to try and get capital projects going, and the P3 industry cannot ignore that, we need to embrace it to make it successful,” Brown adds.
None of this is to say that equity no longer has a role to play. “In Canada, there has been a shift from traditional fixed-price procurements towards a collaborative model, alongside discussions on the value of equity,” says Sia Kusha, senior vice president and group head of business development & partnering at Plenary Americas. “We have seen these conversations before and we remain confident that this continuing evolution towards a more collaborative model is good for the industry as long as there is recognition for the leading role of equity in that model.”
The P3 industry can embrace and respond to a changing world - we’ve all seen this in the last couple of years with the rise of progressive P3s, some of which even forgo the financing element.
“Progressive [P3s] have shown that instead of just being [ways to contend with] technical problems, they can also contend with commercial problems,” says John Smolen of Ballard Spahr.
Some have questioned whether these kinds of deals are a long-term rival to hard-bid P3s, but it looks as though the model has been firmly clicked onto the general toolbelt, as it enabled authorities to find a way to “figure out a way to get past early stage issues and heartburn”, agrees fellow Ballard partner Steve Park.
“You do see the market turning a little bit back, at least you know that having a progressive P3 as an option is there,” Park concludes.
Having the option there is crucial - it strikes right to the core of delivery. In that sense, it will also be helpful to have the potential for private investment, too. “We continue to see a move towards a more collaborative environment where there is greater emphasis on risk sharing,” Kusha continues. “In this environment, equity investors are in the best position to have long-term alignment of interests with the owners and as such would be the best partners over the life cycle of the asset.”
“There’ll be a lot more success for P3 in the US market when P3 stops talking about P3 and starts talking about project delivery and how to improve that,” says Joshua Schank of InfraStrategies. It’s a punchy point.
“There is a project delivery crisis in the US, certainly every transit project is over budget, takes more time to plan but yet people don't accept that P3 could be a potential solution to that.”
While the IIJA did put P3 on the map for authorities, mentioning it a whopping 40 times, it did so in a quite particular context - as one of many models on a value for money spectrum.
Undoubtedly, this is a vote of confidence in the model as a whole, but it’s not a mandate, it’s a platform. It is up to the P3 industry to show its worth.
“When you start to think about delivery models as a spectrum, of which you pick the best one, I think P3s could do better than the traditional methods,” Schank says. “The marketing of P3 as a financing solution does not work but the marketing of better project delivery has to work. Because everyone sees that project delivery isn’t working as it should today.”
P3s should put a different food forward, other than simply being a financing tool. It has many other benefits to offer; from innovation, to risk sharing, to timeline certainty.
“The P3 industry should be a leader in trying to change the delivery crisis, rather than focussing on the private finance elements,” Schank concludes. “Things have to change.”
While there will still be a need and a niche for DBFOM, the idea that the acronym typifies what a P3 is could be changing in front of our eyes.
Instead of being the archetype of P3, it’s just one of many on the delivery spectrum that the industry is capable of. By only being used when it’s the best fit, that could mean the DBFOM model has a stronger future after all. We have already seen this in places like Alberta, in Canada, where a planned schools P3 was taken off the table. Such moves could be seen as damaging to the industry, but Kusha is more sanguine.
“The P3 asset delivery model should only be applied to certain type of project. If the business case analysis and/or value for money determination doesn't reach certain thresholds, or produce certain results, simply forcing a project procurement through a P3 will not be a prudent decision,” he says. “We (the industry) would rather only do P3s when and where there is the greatest value generated for all parties.”